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A short story of Indian economy’s struggle to recovery

Fifteen months down the road to economic recovery, the economy is still limping back to the normal circa 2019-20. GDP in the first quarter of the current fiscal year (April to June fiscal year 2021-22) at INR 32.4 trillion (constant terms) remains 9 percent below the INR 35.7 trillion in the same quarter in 2019-20. The good news is that it is 21 percent higher than the previous quarter (January to March fiscal year 2020-21). The trend is becoming brighter with each passing month that the stranglehold of the pandemic ebbs.
 
However, it is good to remember that recovery from a continuing external shock, like the pandemic, is quite different from growing GDP in real terms, past levels achieved in more normal times, as in 2019-20. Graduating from the “recovery phase” to the “rehabilitation phase” which precedes the “development-all-engines-firing” phase means clocking an average growth at 8.5 percent over the remaining three quarters of the year, to cross the GDP level of INR 145.7 trillion (constant terms) in 2019-20. 
 
It is good to remember that recovery from a continuing external shock, like the pandemic, is quite different from growing GDP in real terms.
 
This seems like a cakewalk, with the economy growing at 21 percent in Q1 over the same quarter last year. Now, despite the 21 percent growth in Q1 this year, the value added in real terms (INR 32.9 trillion) is 17 percent below the value added in the preceding quarter of last year (INR 39 trillion Q4 Fiscal 2020-21). The RBI predicts growth to be 9.5 percent this year which, if achieved, would set the stage for India to enter the “rehabilitation” phase of economic reconstruction, albeit with large dollops of social protection.
 
Controlling consumer inflation is the key
 
Key in this endeavour is controlling consumer inflation, which is coasting along at the upper bound level of 6 percent. This is when we will be testing the sinews of the economy — our capacity to enhance productive investment, our ability to tease out better output from existing investments and our ability to invest in or buy research and development advances to lift the Indian economy to the next-gen level. 
 
These will be salient issues for Fiscal 2022–23; not this year, which is more about stabilising the economy. Key in this endeavour is controlling consumer inflation, which is coasting along at the upper bound level of 6 percent.
 
Agri & Exports may come our rescue
 
We must count our blessings that nature has been benign during the pandemic. Agriculture, which did well last year to grow at 3.6 percent annually over 2019-20 levels, continues to be the source of growth and jobs with a 4.5 percent growth in Q1 of this year over the same quarter last year. This happy situation might change over the next quarter if the Kharif crop gets affected by delayed sowing, due to the disturbed rainfall pattern this summer.
 
Both agriculture and exports highlight the advantages of a diversified economy and diversified markets, in riding out a domestic downturn.
 
Another saviour is exports, which increased 7.7 percent this quarter over the same quarter last year. Both agriculture and exports highlight the advantages of a diversified economy and diversified markets, in riding out a domestic downturn. Had agriculture been more dynamic and responsive to the opportunities in international markets, rather than primarily focused on subsidy-fuelled cereal production for domestic consumption, the positive outcome for the economy, jobs and incomes could have been even more substantial.
 
Indifferent investment outcomes
 
With business capacity utilisation levels low, at around 70 percent, only the foolhardy or those unaffected by the pandemic, would commit funds to clunky capital investments.
The INR 2.1 trillion drop in investment level evidences that the INR 7 to 8 trillion in extra liquidity infused by the Reserve Bank of India was not channeled into productive real assets. 
 
Instead, it seems to have served to enhance demand for consumer durable via easy credit facilities to “bankable” middle class consumers or companies, funded MUDRA loans to unemployed youth and small entrepreneurs, which have NPA levels in the low double digits or financed investments in stock markets keeping them at rich levels relative to average yield. This is not surprising. 
 
With business capacity utilisation levels low, at around 70 percent, only the foolhardy or those unaffected by the pandemic, would commit funds to clunky capital investments.
 
De-leveraging the public sector
 
More heartening is the government’s recent initiative to monetise operational assets of the public sector by leasing them on a long-term basis to private investors. This will substitute private for public sector capital and provide an exit option for public sector capital.
 
Delinking government from being the major investor in infrastructure is, consequently, urgently necessary, as was conceived in the post 2008-09 western financial crisis period.
 
With tax levels to GDP stagnant, government budgets spend far less on social sector support than is the norm across East Asia or Europe. One of the lessons from the pandemic is that paying short shrift to health infrastructure and services can have serious negative economic consequences. 
 
The quality of publicly provided or supported education is India is well documented to be far from adequate for imparting life-skills or preparing aspiring youth for productive jobs. Sharp increases in outlays for the provision of social services are a priority.
 
Delinking government from being the major investor in infrastructure is, consequently, urgently necessary, as was conceived in the post 2008-09 western financial crisis period. The July 2021 Union government accounts outturns supports this hypothesis of the need to converge government finances in areas where private investments might not easily flow and to vacate the areas where private investment feels comfortable investing. 
 
Public to Private isn’t a solution
 
Using the public sector as a Trojan horse to rail-road pesky regulatory constraints, in response to the demands of speculative private capital, is not a long-term productive use of investment resources.
 
Substituting public capital, employed in business ventures, with private capital; conserving public capital for social sector investments; and pulling-out-all-the-stops in making business and environmental regulations efficient and least-cost is the trifecta of initiatives demanding attention.
 

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